A leveraged buyout is the purchase of a controlling interest in a corporation using large amounts of leverage (borrowed money). Leveraged buyouts are often associated with hostile takeovers, and were a favorite tool of the 1980s corporate raiders, but a leveraged buyout need not be hostile, and in many cases is welcomed by the managers or shareholders of the corporation being bought.

What makes a leveraged buyout a powerful tool for generating high returns for the buyer is that the buyer typically uses the assets of the company targeted for purchase as collateral for the loans used to buy that company. This means that the buyer needs to post little actual cash or collateral of their own to make the purchase, creating the potential for massive profits on the transaction, assuming that the buyer has found a target company with suitably high free cash flow or valuable assets that can be sold off to pay the debts incurred in purchasing the company.

Essentially, the targeted company winds up paying for the purchase of itself.

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